2022 (10) TMI 1300 - AT - Income Tax

Reassessment under s.147/148 quashed as AO abandoned original reopening reason; all other issues rendered academic

ITAT Mumbai allowed the assessee's appeal, holding the reassessment under s.147/148 invalid. The AO had reopened the assessment on vague and ambiguous ... Reopening of assessment u/s 147 - assessment was sought to be reopened on the ground that income had escaped assessment on a certain issue and AO make an assessment or reassessment on other issue - HELD THAT:- We are of the considered view that when the AO has reopened the assessment on the basis of vague and ambiguous reasons and during the assessment proceedings has dropped the core issue as to making the payment credit by the assessee to M/s. Durga Prasad & Co. alleged to have escaped assessment, the very initiation of the reopening is not sustainable in the eyes of law in view of the law laid down in case of Jet Airways (I) Ltd. [2010 (4) TMI 431 - BOMBAY HIGH COURT], in case of Sh. Anugrah Varshney [2016 (4) TMI 531 - ITAT AGRA] and Mohmed Juned Dadani [2013 (2) TMI 292 - GUJARAT HIGH COURT] Since very initiation of reopening under section 147/148 of the Act is held to be invalid other grounds on merits has become academic and as such need not be decided. Appeal filed by the assessee is allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the reassessment proceedings initiated under sections 147/148 were valid when the reasons recorded referred to an alleged payment to one party, but the eventual addition was made in respect of a transaction with another party. 1.2 Whether vague and ambiguous reasons, based solely on information from the investigation wing without proper independent application of mind by the Assessing Officer, could validly sustain the formation of 'reason to believe' that income had escaped assessment. 1.3 Whether, in the absence of any addition on the very issue forming the basis of the recorded reasons for reopening, the Assessing Officer could validly make an addition on another issue under section 147, in light of judicial interpretation of section 147 and Explanation 3 thereto. 2. ISSUE-WISE DETAILED ANALYSIS 2.1 Validity of reassessment when addition not made on the ground recorded in reasons Legal framework: The judgment examines section 147 and Explanation 3 thereto, with reliance on decisions interpreting the scope of reassessment when the final addition differs from the issue for which 'reason to believe' was initially formed. The Court relies on the interpretation of section 147 in decisions of the High Courts in Jet Airways (I) Ltd., Mohmed Juned Dadani, Ranbaxy Laboratories Ltd., and Sh. Anugrah Varshney. Interpretation and reasoning: The Court notes that the recorded reasons for reopening stated that income had escaped assessment because of a payment credit of Rs. 15,00,000 allegedly made by the assessee to M/s. Durga Prasad & Co., based on information of high value transactions in the bank account of M/s. Govind Sharda & Co. and M/s. Durga Prasad & Co. However, in the assessment proceedings, the Assessing Officer shifted focus and proceeded on the footing that the assessee had received Rs. 15,00,000 from M/s. Govind Sharda & Co., and the entire assessment order was based on proving receipt of this amount, not on the alleged payment to M/s. Durga Prasad & Co. The original core issue (alleged payment to M/s. Durga Prasad & Co.) was effectively dropped at the assessment stage. Referring to Jet Airways (I) Ltd., the Court reiterates that section 147 obliges the Assessing Officer to assess or reassess 'such income' which formed the basis of the belief of escapement; only if that income is so assessed or reassessed can the Assessing Officer also assess or reassess any other escaped income coming to his notice during the proceedings. If, after issuing notice under section 148, the Assessing Officer accepts that the income for which he initially had 'reason to believe' has not in fact escaped assessment, he cannot independently assess some other income without issuing a fresh notice. The Court further cites Mohmed Juned Dadani to endorse the view that, even after insertion of Explanation 3 to section 147, the Assessing Officer cannot sustain reassessment solely on some other ground if no addition is made on the ground for which the assessment was reopened; otherwise, statutory conditions (such as those relating to failure to disclose) would be rendered nugatory. The decision in Sh. Anugrah Varshney is cited to emphasize that the presence of Explanation 3 does not alter the principle that, without making addition on the income originally believed to have escaped assessment, the Assessing Officer has no jurisdiction to make other additions under section 147. Conclusions: The Court holds that since the Assessing Officer did not make any addition on the specific issue which formed the basis of the reasons recorded (alleged payment of Rs. 15,00,000 to M/s. Durga Prasad & Co.), but instead made an addition on a different footing (receipt from M/s. Govind Sharda & Co.), the reassessment is invalid. The reassessment cannot be sustained when the core issue for which the assessment was reopened is dropped and no addition is made on that issue. 2.2 Sufficiency and validity of 'reasons to believe' and application of mind Interpretation and reasoning: On examining the recorded reasons, the Court finds them to be 'very vague and ambiguous', based merely on information from the investigation wing about 'high value transactions' with two concerns and an alleged payment credit of Rs. 15,00,000 to M/s. Durga Prasad & Co. The Court observes that the Assessing Officer himself was not clear whether escapement was on account of such alleged payment to M/s. Durga Prasad & Co. or merely because of high value transactions noticed in the bank account of M/s. Govind Sharda & Co. This lack of clarity and subsequent shift in stand-where the assessment ultimately proceeded on receipt of Rs. 15,00,000 from M/s. Govind Sharda & Co.-demonstrated non-application of mind at the stage of recording reasons. The Court notes that the Assessing Officer 'forgotten' the very basis stated in the reasons when issuing notice under section 142(1) and framing the assessment, instead introducing new facts relating to a different party and different nature of transaction. Conclusions: The Court concludes that initiation of reassessment on the basis of such vague, ambiguous, and internally inconsistent reasons, without proper application of mind by the Assessing Officer and with the core recorded issue later abandoned, is not sustainable in law. Consequently, the reopening itself is held to be invalid. 2.3 Effect of invalid reassessment on additions under section 68 and other grounds Interpretation and reasoning: Having held that the initiation of reassessment under sections 147/148 is invalid on account of vague reasons and the failure to make any addition on the ground forming the basis of the recorded reasons, the Court considers the impact on the merits of the addition under section 68 and other grounds raised. It notes that where the very foundation of the reassessment is vitiated, issues on merits become purely academic. Conclusions: The Court quashes the reassessment order framed under section 143(3) read with section 147 and the order of the first appellate authority. In view of the invalidity of reopening, the Court declines to adjudicate the merits of the addition under section 68 or other substantive grounds, treating them as academic.